## Facts

- Fred W. Amend Co., an Illinois candy manufacturer and distributor, was founded by Fred W. Amend, who remained an active officer and board chairman during the tax years at issue.
- Amend and his wife owned about 47.5% of the corporation’s common stock; unrelated shareholders held about 29%.
- Beginning in 1954, Amend consulted R. M. Halverstadt, a Christian Science practitioner, regarding personal and business problems.
- For fiscal years ending October 31, 1964 and 1965, the corporation paid Halverstadt $5,500 and $6,200 and claimed the payments as deductible business expenses under I.R.C. § 162(a).
- Halverstadt’s services consisted of discussions and spiritual treatment (including prayer) directed at Amend’s spiritual awareness and state of mind, rather than conventional business consulting.
- The Commissioner disallowed the deductions and assessed deficiencies; the Tax Court sustained the disallowance.

## Issues

1. Whether the corporation’s payments to a Christian Science practitioner were “ordinary and necessary” business expenses deductible under I.R.C. § 162(a).
2. Whether the payments were, in substance, nondeductible personal expenses benefiting a principal shareholder/officer rather than bona fide corporate business expenses.

## Decision

- The Seventh Circuit affirmed the Tax Court.
- The court held the taxpayer failed to prove the payments qualified as ordinary and necessary expenses of the corporate business under § 162(a).
- The court agreed the services were personal and spiritual in character and primarily benefited Amend, despite references to business problems.
- The court rejected the contention that the Tax Court used incorrect legal criteria and concluded the findings and application of § 162(a) were supported by the record.

## Legal Principles

- A deduction under I.R.C. § 162(a) requires the taxpayer to show the expenditure is an “ordinary and necessary” expense paid or incurred in carrying on the taxpayer’s trade or business.
- Expenditures producing primarily personal benefits to an officer or shareholder are not deductible as corporate business expenses, even if discussions touch on business matters.
- Courts evaluate the objective business character and purpose of claimed expenses; indirect improvements to an executive’s personal well-being or mindset do not, without more, establish a deductible corporate expense.
- Closely held ownership and control may support an inference that claimed corporate expenditures are, in substance, personal benefits (and potentially constructive distributions) rather than business expenses.

## Conclusion

The court upheld the disallowance of the deductions because the payments for spiritual counseling and treatment, though sometimes connected to business concerns, were principally personal to the controlling officer-shareholder and therefore not ordinary and necessary expenses of the corporation’s candy business under § 162(a).


Fred W. Amend Co. v. Commissioner of Internal Revenue, 454 F.2d 399 (7th Cir. 1971)